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Friday, 14 September 2007

Excellent report on housing affordability in New Zealand from the NDU's Joe Hendren here.

Greater numbers of New Zealanders are no longer able to afford their own home

Affordability is now the worst it has ever been: The February 2007 ‘Home Affordability' report from the Massey University Real Estate Analysis Unit stated "Affordability is now the most difficult it has been since the series began in February 1989"[1].

House prices are outstripping wages: In the three years from 2004 to 2006 increases in house prices outstripped wage rises by 4 to 1. House prices increased by 38.5 per cent while wages went up by 8.7 per cent. House prices increased 9.7 per cent in the year ending December 2006. The Reserve Bank expects higher levels of house price inflation in 2007 as the average number of days taken to sell a house has fallen to "very low levels"[2]. A March 2007 study showed almost three-quarters of the average take home pay is needed to service the mortgage on an average New Zealand house[3]. In Auckland a mortgage now takes up 92.8 per cent of the local average take home pay (up from 71.1 per cent two years ago), whereas in Central Otago the costs of a mortgage are now more than the average salary (105 per cent, up from 91 per cent in December 2004)

Rents are rising faster than wages: In 1993 rents were 26 per cent of the average wage. In 2006 rents had risen to 32 per cent of the average wage nationally and 37 per cent in Auckland[4]. Between 1993 and the first quarter of 2007 rents rose by 86 per cent while wages only rose by 50 per cent. Higher rents make it harder to raise a deposit for a house.

Increased household debt levels: Household debt as a proportion of annual disposable income has risen from around 74 per cent in 1992 to 160 per cent by 2006.

Fewer Mortgages: While the amount of total household borrowing may have increased considerably the actual number of households making mortgage payments has fallen. In 2006 there were 405,267 households making mortgage payments, down from 448,374 in 1996.

Demographic changes: While traditionally housing policy has been geared to conventional nuclear families, these arrangements now represent a minority of households. This has had a significant impact on the ability of New Zealanders to afford their own home, as it is significantly more difficult to buy your own home on the basis of a single income, especially as wages and salaries are now worth less in real terms than a generation ago.

The number of single person dwellings continues to increase, with the proportion of such households increasing from 20.7 per cent in 1996 to 23 per cent in 2006[5].

Many single parent families (particularly those led by women) are stuck in the rental market due to the financial constraints of a single income.

With average mortgage costs now taking up a high proportion of the average income, home ownership is impossible for the majority of people reliant on a single income.

Home ownership rates are falling: Rates of Home Ownership have fallen from 73.8 per cent in 1991 to 66.9 per cent in 2006.

Why homes are becoming unaffordable

Low Wages: Despite record corporate profits, low levels of unemployment and high demand for staff, wage rises for workers in New Zealand have continued to lag behind the rest of the OCED in real terms. Over the 10 years between 1993 and 2003 the average annual change in real compensation per employee was 0.7 per cent, compared to the OCED average of 1.1 per cent and the Australian average of 1.3 per cent[6].

Student Loans: The obligation to make repayments to student loans has reduced disposable incomes. In some cases banks have cited student loans as a reason for turning down a mortgage application.

Rising Interest Rates: The costs of servicing a mortgage at high interest rates is making home ownership less affordable for first home buyers. Those already with mortgages face significant rises in mortgage costs when their fixed rate mortgage comes up for renewal. Due to recent rises in the Official Cash Rate (OCR) some will face paying an additional $200 a fortnight, despite being on a fixed income in real terms.

Speculative Investment in Property: Speculation on secondary properties bought for investment purposes is driving up house prices.